A Cheniere Energy facility in Portland, Texas.
Eddie Seal/Bloomberg
There is good news and bad news for oil-and-gas pipelines as the U.S. emerges from the pandemic. They are benefiting from a rise in demand and prices, but the regulatory environment and the push toward green energy imperil their future.
The company behind the Keystone pipeline, intended to take oil from Canada through the into the Midwest, abandoned its plans earlier this month, after the Biden administration had revoked a permit earlier this year. The move could signal further regulatory hurdles for pipelines going forward.
Of course, regulatory issues can sometimes be a good thing for incumbent players, because they mean there will be less competition. The long-term effects of the Keystone cancellation are still unclear.
Goldman Sachs analyst Michael Lapides thinks pipelines and other energy- infrastructure stocks can continue to gain as oil prices stay strong and the companies are able to transport more fuel. So far this year, the Alerian MLP Index (ticker: AMLP) and the Alerian Midstream Index (AMNA) are up 49% and 41%, respectively, versus 13% for the S&P 500. Those two indexes lagged behind the market by 56 and 46 percentage points, respectively, last year.
in the second half of 2021, “we believe investors will continue rewarding companies with visibility into material free cash flow generation and a clear path to material returns to shareholders and in some cases rapid deleveraging,” Lapides wrote. His favorites include Cheniere Energy (ticker: LNG), Targa Resources (TRGP), and Energy Transfer (ET). On Monday, Lapides also upgraded Cheniere Energy Partners (CQP) to Buy because the stock has underperformed some competitors and has some protection from risk.
Cheniere Energy Partners is a master limited partnership that is a subsidiary of Cheniere Energy. Both companies process and ship natural gas in liquid form. Cheniere Energy Partners signs long-term contracts that held up during the downturn, and those contracts should continue to protect the company.
Lapides’s target for the stock price is $56; shares were up 1.7% on Monday at $43.97. Barron’s wrote positively about the stock in May 2020, when it traded at $33.
But Lapides is less optimistic on Kinder Morgan stock, given its relatively rich valuation after a strong performance. Kinder Morgan is one of the largest pipeline-operators in the country. He downgraded shares to Sell.
Lapides writes that he could warm to the stock if the company gives some more details on what it intends to do with excess cash in the years ahead. His price target is $15; the stock was down 1.6% on Monday to $18.84.
Kinder Morgan declined to comment on the note.
Write to Avi Salzman at [email protected]
